March 10, 2014 / 6:12 PM / 6 years ago

Puerto Rico eyes 8 percent coupon on $3 billion bond sale: market source

(Reuters) - Puerto Rico’s $3 billion in general obligation bonds will be offered with an 8 percent coupon, according to preliminary price talk wire obtained on Monday by Reuters, a lower rate than many thought the cash-strapped U.S. territory would have to pay.

All of the bonds, expected to price on Tuesday, will be offered in a single 2035 term maturity, and possible yields for the bonds ranged from 8.625 percent to 8.875 percent, the wire indicated.

Many in the $3.7 trillion municipal bond market had thought junk-rated Puerto Rico would have to pay closer to 10 percent or higher to borrow, given its chronically weak economy and fears that it may need to restructure its debt at some point.

“The price talk was more aggressive than expected,” said Matt Fabian, a managing director at Municipal Market Advisors. He noted that the previous “sky-is-falling” pricing came early. “It was too soon to know that this kind of pricing was available.”

A rise in the price of outstanding Puerto Rican debt in the secondary market over the last month has also helped, said Michael Comes, a portfolio manager at Cumberland Advisors.

“Nobody really anticipated how far Puerto Rico would rally. Some of its general obligation debt is trading around 7.25 percent, so they will have to price the new bonds at something of a concession to get people to come in,” he said.

The deal, one of the biggest ever high-yield municipal bond offerings, has a tentative sinking fund schedule beginning in 2022 for bond redemptions.

High-yield hedge funds are expected to dominate the sale, with many traditional, municipal bond institutional investors shut out by restrictions on holding bonds rated below investment grade.

According to a draft deal document released last week, the bonds will be sold in denominations starting at $100,000, a level that would exclude most individual buyers.

The three largest Wall Street ratings agencies cut Puerto Rico to junk status last month, citing worries about the U.S. territory’s ailing economy and its ability to finance itself.

The Caribbean island has long struggled with chronic deficits, high joblessness and an economy that has been shrinking almost continuously since 2006. It has about $70 billion of debt outstanding.

The draft offering document also included an unusually lengthy list of risks to the bonds, including a possible restructuring of the commonwealth’s entire debt portfolio. Puerto Rico said last week it had hired a restructuring expert as its financial adviser.

The territory cannot file for bankruptcy under U.S. law.

Comes said none of those risks appear to be scaring off potential investors, saying he has heard talk that the deal will be as much as three times oversubscribed.

“Compared to the sovereign debt of some emerging markets in Latin America, these yields are considerably higher, so that’s very attractive to distressed debt buyers and various types of non-traditional municipal bond buyers,” he said.

Additional reporting by Karen Pierog in Chicago, Steven C. Johnson and Hilary Russ in New York; Editing by Meredith Mazzilli and Leslie Adler

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